ETF Of The Week: Odd Times For Ireland

On Wednesday, Theresa May survived a bid to oust her as British prime minister, a salvo that originated from within her own ruling party, the Conservatives. But that doesn't yet mean Brexit is a done deal—far from it.

On Thursday, May headed to Brussels, the seat of the European Council, to negotiate further concessions on "the Irish backstop," a key point of contention in the U.K.'s withdrawal agreement.

First agreed to in December 2017, the Irish backstop ensures an open border between the European Union's Republic of Ireland and the U.K.'s Northern Ireland. As a result, part of the U.K. would remain in the European customs union and economic regime for some time, even after the U.K. withdraws from the EU

Given Ireland's history, the compromise was seen as necessary to prevent the return of a divided island. But the Irish backstop, which many pro-Brexiteers find unacceptable, threatens to upend the hard-fought withdrawal deal.

Thus, investors in Irish companies have found themselves at the center of a brewing economic and political crisis, and many international investors are poring over their European investments accordingly.

Investing In Ireland

U.S.-based international investors can only invest in one of the two Irish markets: the Republic of Ireland, which is tracked by the iShares MSCI Ireland ETF (EIRL). All the companies within EIRL are domiciled or headquartered in the Republic of Ireland.

Still, because the two countries share an island, what happens in Northern Ireland influences what happens in the Republic of Ireland, and vice versa.

Poor Performance & Top-Heavy Portfolio

EIRL is a cap-weighted, broad-based slice of the Republic of Ireland's market. It is, however, exceedingly top-heavy; by weight, the top 10 stocks in the fund make up 75% of its total portfolio. CRH Plc alone comprises 22% of the fund.

Since the introduction of the Irish backstop provision, EIRL has posted a miserable 12 months of performance, dropping 17.5% year-over-year. (In comparison, the iShares Core MSCI Europe ETF (IEUR) has dropped 11.34% over the same period.)

This poor performance isn't likely to abate anytime soon, not unless May or EU lawmakers are hiding a Brexit deal somewhere that is magically beneficial to all parties. Even May's vote did little to boost the fund, which, as of Thursday afternoon, had risen just 1% on the news.

One further caveat about EIRL: Given the small size of the Irish market, this ETF is highly illiquid, with low daily trading volumes and wide spreads. Investors should trade EIRL with care.